Thursday, February 16, 2006

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A libertarian barista on Starbucks

Jacob Grier has a blog post at Smelling the Coffee on the contradictory impulses he feels towards Starbucks -- as a libertarian who nevertheless thinks quality control at Starbucks has gone down.

Read the whole thing, but the part about how Starbucks has affected the industrial organization of coffeehouses is particularly interesting:

Let's begin with the easy issue: Starbucks is driving independent coffee shops out of business. Anecdotally, this may seem obviously true. Many people can name a favorite coffee shop that went out of business soon after a Starbucks moved into the neighborhood. The fact is, though, that Starbucks is creating a market, not destroying it. Growth in both independent and corporate coffee shops has been huge over the past fifteen years, thanks in large part to consumers being introduced to specialty coffee drinks in the safe confines of their local Starbucks.

The Specialty Coffee Association of America, a leading trade group, tracks American retail sales. In 1989, the SCAA estimates there were 585 coffee houses operating in the U.S. By 1995 that number had risen to 5,000. By 2003, there were 17,400 shops in operation.

Starbucks growth is notable, but it's far from the sole factor driving these new shop openings. The SCAA reports that 57% of the shops open in 2003 were independent, having only one to three locations. Microchains (4-9 units) made up another 3% of the market. All the large chains combined make up the remaining 40%. [Source .pdf]

A 2004 article in the Willamette Weekly finds a similar pattern at work in Portland. In 2003, a misguided miscreant attempted to blow up a new Starbucks in a neighborhood where residents claimed to not want the imperial corporate giant. But a survey of the local yellow pages reveals that indie shops were doing just fine in Portland:

According to the Portland Yellow Pages, before Starbucks came to Portland in 1989, there were 28 coffee shops in the city. Today, there are 91 non-Starbucks coffeehouses in Portland proper, compared with the chain's 48 stores within city limits.
Bellisimo Coffee Infogroup, a consulting company for coffee shops, notes that Starbucks plays an important role in giving people their first gourmet coffee experience, after which they can and often do branch out to try out other sources. Tully's, a smaller chain, agrees, intentionally locating new stores in the vicinity of existing Starbucks locations. In the same Willamette article, one coffee expert gets perhaps a bit too effusive, but his point is well made:
"Every morning, I bow down to the great green god for making all of this possible," says Ward Barbee, publisher of the Portland-based coffee trade magazine Fresh Cup.
Of related interest: this Tim Harford essay in Slate about why Starbucks doesn't advertise it's "short" cappucino.

posted by Dan on 02.16.06 at 04:19 PM


Mmm. This is a hard call. Back in the late 1980s I was introduced to 'coffeehouse' coffee. Back then it was all independents. Certainly in coastal California 'latte' towns the market was there before, way before, Starbucks. But the hinterland, no, I guess not. And independents probably would have had the capital or the marketing power to open up that frontier. At the same time, there might have been more coffee diversity in the regions were the market was already begining to grow because of independents.

posted by: Mitchell Young on 02.16.06 at 04:19 PM [permalink]

Let's also remember that many places (Portland, particularly) have many local chains. In Portland, it's Coffee People and in Denver, it's Peaberry (sp?)

posted by: Klug on 02.16.06 at 04:19 PM [permalink]

Hey, I love coffee, but I can't stand anything made by Starbucks. Their coffee always tastes burnt to me (I like it black, unadorned). But their right to sell, expand, etc., I will defend to the death.

posted by: John on 02.16.06 at 04:19 PM [permalink]

John-you beat me to it. I have no problem with Starbucks (or Walmart, or Microsoft, or -name your favorite corporate demon). I've never understood why, of the literally thousands of stores within a 3 mile radius of my house, the one with "Walmart" or "Starbucks" is somehow evil compared to the other 1,998. But Starbucks has always tasted bitter to me. I never buy the stuff.


posted by: Steve on 02.16.06 at 04:19 PM [permalink]

My favorite coffee shop in Chicago is Intelligentsia. The owner is on the board of the Specialty Coffee Association of America. He agrees that Starbucks grew the market for expensive coffee drinks and it has helped high-end coffee shops enormously. The small shops that failed just weren't that good. Personally, I don't like Starbucks espresso because it tastes burnt and the employees can't foam the milk properly.

posted by: Dude on 02.16.06 at 04:19 PM [permalink]

Dude -- ditto on the Intelligentsia, great coffees and great retail locations. Have you tried Metropolis in Edgewater?

posted by: Willie on 02.16.06 at 04:19 PM [permalink]

Or Julius Meinl (vienna,chicago) lakeview, outstanding pastry selection!

posted by: centrist on 02.16.06 at 04:19 PM [permalink]

Another 2.5 cheers for Starbucks from me for two connected market-related/personal reasons.

First, Starbucks changed Tokyo, where I lived for nearly five years in the mid-to-late 90s, for the better. Before Starbucks, it was impossible to find a non-smoking coffee shop and nearly impossible to find a coffee shop with a non-smoking section that meant anything. When I asked my friends and co-workers why doesn't someone open a non-smoking coffee shop to cater to the hundreds of thousands (if not millions) of coffee drinkers who don't smoke, they all uniformly poo-pooed the idea. It would never work. And then Starbucks muscled their way into Tokyo in a few locations and the place was packed consistently.

Second, I would second the idea that neighborhood coffee shops are doing okay. There certainly aren't as many as there used to be but they do exist and receive business because they are better in several ways to Starbucks--better atmosphere, better service, better coffee, etc. Since a lot of people apparently despise Starbucks in a nearby trendy neighborhood, they are perfectly willing and happy to cross the street to support their competitor.

Both cases provide very visible evidence for the invisible hand.

posted by: IPEinVA on 02.16.06 at 04:19 PM [permalink]

Hey, this thread gives me a chance to ask a question that's really been on my mind. I really hope someone can answer this.

In Anchorage, there is literally a "coffee hut" every couple of blocks. Usually, a small-time entreprenuer will identify a business at a good location, and approach the owner with a deal: You let me set up a hut in your parking lot, and I'll pay rent (or a percentage). It's really a no-lose deal: The two business owners profit, and the public gets very convenient coffee (plus tea, muffins, the usual). Most coffee hut owners operate only 1-3 huts, suggesting that there is plenty of business to go around.

So there are hundreds of these little places all over Anchorage. I'd heard non-Alaskan visitors say that this was unusual, but I didn't give it too much thought. Then my wife and I visited Dubuque, Iowa, and then Chicago. We were immediately struck by two things:

1. In Iowa, very few coffee establishments of any kind;

2. In Chicago, Starbucks are everywhere, but nary a single Anchorage-style coffee hut to be seen.

My wife asked why that is. As to Iowa, I have no idea -- maybe corn and coffee just don't mix? WRT Chicago, my guess was that Starbucks used its influence to set up a regime of health code inspections, etc., that created a barrier to entry, making Anchorage-style mom-and-pop operations untenable.

Is that the case? Can any midwesterners comment on the difference in coffee offerings between the three regions?

- Alaska Jack

posted by: Alaska Jack on 02.16.06 at 04:19 PM [permalink]

Interesting observation. I haven't heard anything about Starbucks creating barriers to entry via regulation. I did talk to one potential entrepreneur where I live in Arlington, VA, who has been considering opening a coffee hut. He found that local regulations against drive-thrus would make this difficult. Similar regulations may exist elsewhere.

I'd guess the difference has more to do with a greater demand for coffee in the NW, but I'd be interested to hear more if people know of other regulatory barriers that could be at work.

posted by: Jacob Grier on 02.16.06 at 04:19 PM [permalink]

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